A Highflier Loses Altitude as Google’s Clicks Go Flat

Investors were spooked by a report by the research firm comScore that said clicks on Google ads in the United States were flat in January.

SAN FRANCISCO — Are Internet users clicking on fewer Google ads and putting the company’s growth prospects at risk?

Those questions are weighing on investors, who have cut the value of Google shares by 38 percent since they peaked at $747.24 in early November.

The slide continued Tuesday when Google shares dropped 4.6 percent to close at $464.19, as investors were spooked by a report by the research firm comScore that said clicks on Google ads the United States were flat in January when compared with a year earlier.

In all, Google’s shares have fallen $283 from their peak, wiping out $83 billion in market value, and bringing a aura of vulnerability, at least on Wall Street, to a company that just four months ago seemed unstoppable.

Investors have focused with new intensity on Google’s so-called paid clicks, which grew at 30 percent in the fourth quarter, because the search and advertising giant earns the vast majority of its revenue from text ads, for which it is paid only when users click on them.

Many analysts saw the comScore report as the clearest sign that Google, which does not give forecasts about its future performance, is not impervious to the slowdown that is buffeting the United States economy.

“There are pretty strong signals now that the economic slowdown is having impact on consumers’ behavior online and therefore having a negative impact on Google,” said Clayton Moran, an analyst with the Stanford Group.

Wall Street analysts say that in addition to concerns about the economy, the company is facing a growing number of questions that are weighing on its shares. Has Google gotten so big that its ability to gain further market share is limited? Is its spending out of control? Will it face stronger competition if its two chief rivals, Microsoft and Yahoo, end up merging?

For now, however Google remains a highly profitable company that is outpacing all of its major competitors. Its share of the fast-growing online advertising market in the United States increased to 28 percent last year, from 19 percent in 2005, according to eMarketer, a research firm.

And even some of Google’s biggest critics are reluctant to bet against the company in the long term.

“Everything wrong with Google’s stock is self-inflicted,” said Scott Cleland, an analyst at the Precursor Group, who testified before Congress against Google’s proposed merger with DoubleClick.

Mr. Cleland said the most recent quarter, when Google’s revenue grew at 51 percent while profit rose only 17 percent, was the latest sign that the company was overspending. “If they cut their spending a little, so that they could start gaining earnings momentum again, their stock valuation would return,” he said.

Others point out that the unexpected weakness in “paid clicks” that comScore reported may be the result of deliberate actions taken by Google that may benefit it in the long term.

“I think at least half of it is self-inflicted,” said Jordan Rohan, an analyst with RBC Capital Markets. Mr. Rohan noted that Google has reduced the clickable area in text ads to avoid accidental clicks, which earn it revenue but are of little value to advertisers.

In recent months, Google has taken other measures to improve the usefulness of its ads. For instance, it ended contracts with Web sites whose sole purpose is to carry ads — the kind that Web users are directed to when they mistype a Web address — as those ads tend to deliver poor results for marketers.

Many sophisticated marketers base their search advertising budgets not on the number of clicks they receive, but on the value those clicks create in terms of purchases or sales leads, said Marianne Wolk, an analyst with Susquehanna Financial Group. If Google weeds out poor quality clicks, advertisers may be willing to pay more for every click, Ms. Wolk said.

Google may be cleaning out poor performing sites from its advertising network so it can market the network more effectively to brand advertisers after its acquisition of DoubleClick, which is being reviewed by regulators in Europe, Ms. Wolk said.

“Google has had this history of making major changes to the platform that have had terrific impact on monetization,” Ms. Wolk said. “Given the track record, we will give them the benefit of the doubt.”

Others went as far as to question the accuracy of comScore’s one-month report. During a Jan. 31 conference call to discuss fourth-quarter earnings, Eric E. Schmidt, Google’s chief executive, repeatedly told investors that the company had not been affected by the economic slowdown.

“I am happy to say that we have not yet seen any negative impact from the rumors of future recessions,” Mr. Schmidt said.

Derek Brown, an analyst with Cantor Fitzgerald, said investors appear to be overreacting to data that Mr. Schmidt’s own statements seem to contradict. Mr. Brown noted that while Google’s share decline is significant, other technology stocks that climbed sharply in 2007, like Apple and Research in Motion, are also down sharply, in part, because of concerns about the economy.

Google’s rate of growth has slowed markedly in recent years, from 92 percent in 2005, to 73 percent in 2006 and 56 percent last year. Growth in the fourth quarter was 51 percent, slightly shy of analysts expectations. While many believe that the slowing trend is inevitable given Google’s growing size, others worry it is happening faster than anticipated.

“The fourth quarter didn’t show the company’s growth falling off a cliff, but it did show a slowdown,” said Mr. Moran, of the Stanford Group. “This is a high flying stock that trades a lot on momentum, and the momentum has turned decidedly negative.”

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